Reflections on student lending
How we’ve improved private student loans, plus ideas for better federal loans
A few weeks ago, my company, Navient, announced we would cancel a portfolio of private education loans as part of an agreement to end an eight-year inquiry by several states.
In closing this chapter, I have reflected on why these loans were made in the first place and on ways to improve our education financing system going forward.
In sum, under our January 2022 plan with the states, Navient wrote off $50 million of defaulted student loans with a total balance of $1.7 billion. The dollar difference is because the canceled loans were charged-off years earlier when they defaulted. The qualifying loans at the center of the plan were mostly originated through Sallie Mae between 2005 and 2008 — six years before Navient was created in 2014. These loans moved with Navient when the company spun off from Sallie Mae, with the loan origination operations remaining at Sallie Mae. The vast majority of the loans provided funding for students to attend for-profit schools that later closed down.
A look back before we look forward
During the 2000s, public policies focused on creating access for as many people as possible to attend college and achieve economic mobility.
While much attention was paid to opening the doors wide to higher education, in hindsight, too little focus was aimed at ensuring students would graduate or that the education itself would be of high quality.
Seeing the booming demand for education, many for-profit schools responded by dramatically expanding their student enrollment.
When students couldn’t cover the cost of education through family savings, grants, and federal loans, private lenders such as Sallie Mae and others filled the gap. Private lending was typically limited to students attending schools that were accredited, licensed by state regulators, and eligible for federal government funding such as Pell grants and federal student loans. Virtually all of these loans were made after borrowers exhausted their federal loan and federal grant options, allowing thousands to access a college education.
Private student loans, like federal student loans, are made in good faith with the expectation that students graduate and obtain employment. In other words, they are made based on the projected higher income the borrower will earn after graduation, unlike other types of consumer loans that are based on current income. In the vast majority of cases, these programs work well as students complete their degrees, gain the economic benefit of their education, and successfully repay their loans.
In 2008, I joined Sallie Mae for the second time, and when I arrived, I saw that a small segment of private education loans at certain for-profit schools did not match up to the expectations. The defaults from these schools were noticeably higher than national averages.
When I saw these low rates of graduation and high delinquency and default rates, I ended these loan programs. We did so carefully and responsibly. We continued to support students who were midstream in their educational programs so they could complete their degrees, and stopped the issuance of loans to new enrollees.
To be clear, some of these loans should never have been made, and we regret participating in programs that enabled students to attend underperforming schools.
We did, however, cease lending to these schools when we discovered problems, years before the federal loan programs ended lending.
It is wrong to criticize this very small segment of Sallie Mae legacy loans as “predatory.” These lending programs were designed to increase access to higher education and help students capture the economic benefits associated with a degree. We did not and do not design loan programs to be misleading or create hardships for our customers. No one benefits when borrowers default, including the lender that issued the loan. Again, when we saw the first signs of problems, we stopped these lending programs 14 years ago, and we started enacting major changes.
How we’ve improved private education loans
Today private loans are no longer modeled after federal loans, which are available to all. Originations are rightfully much smaller today than in the past.
In 2009, drawing from the lessons of the Great Recession, we designed a new type of private education loan designed to encourage customers to make payments while in school — a feature that greatly reduces the cost of the loan.
To assist struggling borrowers, we pioneered the first private education loan modification program, which is still offered today. The program provides a lower monthly payment and reduced interest rate scaled to the borrower’s circumstances. Most importantly, it is designed to ensure the amount owed actually decreases each month, rather than grows from accumulating interest.
We helped to expand the availability of student loan refinancing, empowering people with student loans to lower their interest rates and pay off their loans faster. Our in-school loan product today is focused exclusively on nonprofit schools. Most are cosigned and 100% are school certified.
Together, these improvements serve well those who need private education loans. I am proud of my company’s role to help spur innovation and consumer-friendly policies and practices in the private lending space, but I recognize that’s just one component of the overall student loan system.
To improve student lending, we need ideas that address the whole system
Until fall 2021, Navient also serviced federal student loans on behalf of the U.S. Department of Education. We are especially proud that borrowers we served were significantly less likely to default and more likely to be enrolled in income-driven repayment plans than those served elsewhere.
Our time as a servicer for the Department of Education gave us valuable insights — based on years of experience and data — that formed recommendations we have shared with policymakers to improve the system, including:
- Establish one simple income-based “forgive-as-you-go” repayment plan. Rather than multiple overlapping plans, offer a single repayment plan based on income, where the remainder of the payment is forgiven each month. This would prevent the massive interest accruals under today’s programs that hurt borrowers long-term.
- Help students and families before they borrow. Congress should mandate providing better information and financial counseling before students take out their loans. At Navient, we’re offering new digital tools to simplify the process of finding scholarships and comparing college financial aid packages. We are also partnering with Boys & Girls Clubs of America to offer a youth-focused curriculum to support kids and teens at local Clubs, but only the federal government could do this on a broad-based, national basis.
- Expect more from colleges. Policies should focus on improving graduation rates. Institutions that grow their graduation rates should be encouraged and rewarded. Colleges — which admit students and receive proceeds from taxpayer-funded loans — should also face consequences when students do not complete and are unable to repay.
With the right planning and preparation, a college education is often the surest path to economic mobility, with quality career education and apprenticeship opportunities also excellent choices for many.
The recommendations above will require hard work, and there are no doubt other good ideas to consider as well.
For our part, Navient will continue to develop consumer-friendly products to responsibly serve students who need private education loans and people who can benefit from refinancing their loans.
Jack Remondi is president and CEO of Navient. We help our clients and millions of Americans achieve financial success through our technology-enabled financing, services, and support.